The UK insurance industry is fighting to keep its block exemption of EC competition law that allows co-operation between insurers in the EC. Alex Haffner reports
The EC Treaty outlaws agreements which restrict competition; those agreements are void and unenforceable under Article 81(1). In some cases, the companies involved can receive significant fines. However, the Treaty also provides a "get-out" for an agreement caught by Article 81(1) which generates sufficient consumer benefits to outweigh its restrictive effects; Article 81(3) sets out the criteria for making that assessment.
What is the insurance block exemption?
A block exemption applies the conditions in Article 81(3) to categories of agreements within a particular economic sector. Any agreement which comes within a block exemption will therefore automatically benefit from an exemption from Article 81(1).
Co-operation between competitors who could otherwise act independently of one another restricts competition. However, the insurance block exemption recognises that certain forms of co-operation between insurers/reinsurers can benefit consumers (ie policyholders) by promoting new market entry, creating efficiency gains and encouraging industry-wide benchmarks which increase overall standards. The block exemption applies to several different types of agreement, subject to certain conditions which ensure the proper application of Article 81(3).
The review process
In June 2005, the European Commission announced an investigation (Sector Inquiry) into the provision of business insurance and sent out detailed questionnaires to participants at all levels of the market. It has also consulted with a number of industry associations, as well as national regulators. An interim report was published in January 2007 setting out the Commission's initial findings and seeking a final period of consultation with the industry. The final report is now due in September of this year.
One of the key issues raised by the Commission from the outset of its investigation has been whether it should renew the insurance block exemption when it expires in 2010. The block exemption includes provision for a review of its continuing effectiveness from 2008, but the Commission has used the Sector Inquiry to kick-start that process early.
Is the block exemption being used?
The Commission has conducted research into use of the block exemption by measuring the degree of co-operation among insurers, both as between different Member States and across different insurance lines. It found that several European markets seemingly operate with little co-operation between insurers at all. Based on these findings, the Commission has expressed doubts about whether the blanket exemption provided for by the block exemption continues to be justified – if it is necessary why are people not using it?
Is it harming policyholders?
It is not just the lack of use of the block exemption that concerns the Commission, but also the impact on competition where it is relied on - the interim report implies that adherence to its terms is inconsistent. For example, the Commission has uncovered evidence that some associations have made standard policy conditions binding on their members. It is also concerned that associations/insurance groups do not always make joint calculations and studies available to non-members, even though the block exemption obliges them to do so.
"Show us your arguments"
During the Commission's public hearing in February to present and invite discussion on its preliminary findings, the Competition Commissioner, Neelie Kroes, issued a clear message: "show us your arguments for the continuation of the block exemption".
The industry has taken up this challenge with some relish, pointing out to the Commission that co-operation is vital to preserve the smooth operation of insurance markets; for example the London subscription market where several insurers take smaller shares in larger insurance policies. Without such co-operation, policyholders would be unable to place large risks in the most efficient way possible.
Some industry participants have even argued the block exemption does not go far enough. At the time the current block exemption was drafted, the Commission decided not to include claims settlement agreements since it did not have enough experience of these types of agreements to decide whether they should benefit from a blanket exemption. The Comité Européen des Assurances has called for these now to be included to allow policyholders to benefit from reduced delay in making loss settlements.
The main impact if the block exemption were to be removed/revised would be a loss of legal certainty; companies wishing to enter into co-operation agreements of the type otherwise covered would need to sit down with their legal advisers in order to find out the degree of competition law risk involved in each individual case. Clearly this would cause a good deal of upheaval. However, it would also be in line with the Commission's "modernisation agenda" in which it is seeking to devolve assessment of competition law risks to individual companies.
Predicting the outcome in this tussle is not easy. Whether co-operation works for policyholders in the form of lower prices and better products is a complicated question which the Commission has not fully addressed in its interim report. However, from the reaction of Commission officials at the public hearing in February it seems that the force of the industry's response has had an impact. The Commission may now have been persuaded not to recommend any dramatic action on this issue in its final report.
Perhaps therefore the most important outcome of the Sector Inquiry will be a regulatory environment in which the Commission and national competition authorities feel more confident in taking action against infringements of the block exemption. In that case, it is clear that companies will need to be fully aware of their legal position if they are to avoid the heavy hand of the authorities.
